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Commission Watch

Price controls turn upside-down in New England.
Fortnightly Magazine - July 15 2003

Price controls turn upside-down in New England.

Several months have now passed since grid operators in New England introduced the region to a PJM-style standard market design (SMD), complete with a day-ahead market (DAM) and nodal-based locational marginal pricing (LMP) to manage congestion on transmission lines (a major problem in southwest Connecticut). Yet the SMD has not taken all the excitement out of electricity price discovery. Instead, the New England independent system operator (ISO-NE) has found it necessary to augment the new SMD regime with three new ad hoc price control schemes-three schemes so convoluted that they appear to run at cross-purposes, each undoing the other in turn.

Of course, the bid cap of $1,000 per megawatt-hour (MWh) still remains in place as a last-ditch safety net. Yet many observers, including the Federal Energy Regulatory Commission (FERC), still wonder why the $1,000 price ceiling should not be sufficient to guard against gaming or a price blowout. But the physics and politics of bulk power operation and regulation still confound the experts. Even with the new SMD, things don't turn out as simply as they first appear.

For example, in a bizarre twist, one of ISO-NE's three new price control schemes would actually allow some generators to collect an energy price greater than the $1,000 limit on bids. In other words, the safety net will now serve not so much as a cap on prices, but as a floor. The ISO now says that in certain hours of high demand and scarcity of supply, when bulk power markets are most fragile and vulnerable to manipulation, it wants energy prices to rise to the highest permissible level, and perhaps even higher than $1,000, depending on line losses and congestion uplift.

So how did price controls get turned upside-down in New England? The story reveals how ISO-NE has sought to deal with a trio of distinct problems.

One, how should regulators deal with power producers who control a dominant share of available generation and thus might hold or exert market power? Two, how should the market compensate peaking plants (gas fired, simple-cycle combustion turbines) that cost so much that they don't get a chance very often to run and make money, but yet are still essential to maintain reliability in areas with lots of grid congestion? Three, how should ISO's compensate for shortcomings in price-setting software algorithms, so that the SMD will treat all generators fairly and equally, whether they furnish energy for consumption or supply nothing but reserve capacity-not strictly a product, but needed all the same, to keep the system solvent?

In New England, at least, the answers have come in the form of three proposals: Pivotal, Push, and Scarcity.

1. PIVOTAL. To control market power, ISO-NE proposes a two-step price mitigation procedure to govern power producers that control an amount of capacity that exceeds the supply margin (supply minus load) for the New England system during the hour in question. These "pivotal" suppliers (the rule would apply in noncongested areas only), the ISO would flag and evaluate any energy bid that equals

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